Monday, October 18, 2021

Beijing may not be able to stop China’s largest property developer from failing

Beijing has failed to stop Evergrande Group from exceeding its debt limit and may not have the power to do so, according to S&P Global Ratings. The agency said the company’s repeated breaches of its debt-to-earnings ratio framework were troubling, but it did not expect the Chinese government to intervene for fear of reviving economic risks.

Evergrande, China’s largest property developer, hit the pause button on construction projects on a southern Chinese island in an attempt to increase its cash reserves and prevent defaults on a local government loan. The government let Evergrande delay repaying more than CNY11 billion ($1.7 billion) in loans by one to two years as it waits for cash flow to pick up, according to reports on Monday from Reuters and the mainland newspaper The Paper.

S&P said the company had breached its debt-to-earnings ratio framework twice in 2017 and failed to present a plan to correct its debt limits and debt levels. “The company is already on a financially unsustainable trajectory, and we don’t expect it to go into any default,” said S&P analyst Matthew Rosen, in a statement. “Given the potential impact on the economy and financial institutions, we see regulatory action by the Chinese government in this case as unlikely,” he added.

Evergrande had 5.27 billion yuan ($830 million) in net cash as of end-September 2017, about 10 percent of its market capitalization, compared with CNY5.17 billion as of the end of 2016. Evergrande could raise at least CNY3 billion to CNY5 billion in asset sales in the next quarter, according to Reuters.

Evergrande is expected to increase its sales in China’s third quarter and deliver about 40 million square meters of new units, compared with 34 million square meters in the same period last year, the paper said. Sales at Home Credit, a unit of Evergrande, rose 76 percent year-on-year in the third quarter to CNY6.6 billion, it added.

China’s market regulator said on Wednesday that there would be no impact on existing Evergrande housing loans after the company began suspending projects on Jiuzhaigou Island. The island is a project in Guangdong province’s Guandong Province, the government said on its website.

Evergrande stock fell by as much as 10 percent on the Shenzhen Stock Exchange on Wednesday afternoon after the Shanghai Securities News reported on the announcement to suspend on-site construction, saying that Evergrande had relied on home buyers’ pre-sale deposits to pay for the projects. Shares in S&P Global Ratings’ parent, Standard & Poor’s, fell by as much as 4 percent after the Beijing Business Daily said on Wednesday that S&P parent company McGraw Hill Financial, which owns S&P Global Ratings, could also face such a default risk.

Read the full story at South China Morning Post.

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